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Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.


Thursday 7 August 2014

MPC Meeting

All eyes will be on The Monetary Policy Committee’s (MPC) interest rate setting meeting, which is scheduled for today, August 6. The market is anxiously trying to gauge whether UK interest, which have been held at historic lows of 0.5 percent for the longest period in history, are going to rise either sooner, say towards the end of 2014 or sometime later in 2015. Certainly, yesterday’s release of the UK’s Purchasing Managers Index (PMI) survey, which exceeded all expectations comes as a relief for those traders betting on a rate rise before the end of the year.

Yesterday’s PMI, an economic indicator derived from monthly surveys of private sector companies, was bullish at 59.1 percent, bearing in mind that a figure of 50 percent indicates a cutoff level separating expanding from contracting services. So the latest PMI indicator suggests that the trajectory for UK service industry is both upwards and momentous. Indeed, Britain’s service sector was stronger than expected in July, with activity rising at the fastest rate in eight months according to the Markit/CIPS PMI. 

The service sector amounts to more than 75 percent of UK’s Gross Domestic Product (GDP) and it including hotels, bars, restaurants, IT, transport and business services. Such an upbeat PMI data is further evidence that the UK’s economic recovery is gaining traction. The PMI data follows the UK’s April-June Gross Domestic Product (GDP) which showed GDP expanding by 0.8 percent during that period. Reaction on the foreign exchange markets was predictable with the pound rising against the dollar and the euro after the survey was published. 

Interest rate hawks are now screeching louder for rate hikes. Many investors/traders are now wondering, in view of the recent upbeat economic data, whether these calls for a spike in rates has now finally gained the ears of the MPC. To date the Bank of England’s MPC has unanimously voted for interest rates to remain pegged at 0.5 percent.

However, while the latest PMI figures are upbeat it may actually be a red herring for the MPC when weighing up whether to go with the interest rate hawks and raise rates. It’s worth mentioning that the PMI is merely a survey, which doesn’t amount to any official economic data. Indeed, the survey is not totally comprehensive as it excludes retailing, energy and government-provided services. Moreover, in recent times it also tended to point to rather stronger growth than the official data from the Office for National Statistics (ONS). 

Nevertheless, assuming the MPC weighs heavy on the bullish PMI survey, they may have good reason to do so this time around since it is in harmony with April-June GDP figures showing an expansion of 0.8 percent. But the UK economic recovery is patchy. For example, manufacturing barely registered an increase to just 0.2 percent and construction activity fell to 0.5 percent during the same period. Moreover, both Industrial output and construction are down by 10 percent respectively, since the financial crisis. If MPC decides to set interest rates above 0.5 percent towards the latter part of 2014 the impact on already these struggling sectors would be adverse. Higher interest rate for industrial manufacturing implies higher investment costs as the cost of borrowing is increased. Furthermore, higher interest rates trigger a flight of “hot money,” speculative money into the pound, thereby appreciating its value against a basket of other currencies. The appreciating pound make it increasingly more difficult for UK manufactures to sell overseas, hitting exports as UK manufactured goods become more expensive and less competitive in foreign markets. 

The latest June UK British Industrial Output figure underscores the problems, output for industry as a whole rose 0.3 percent in June, lagging a forecast of 0.6 percent, according to ONS. Industry continues to struggle following the financial crisis 2008 and a further appreciation in the pound, brought about by higher interest rates would further hamper UK exports.

To some extent the bullish PMI survey is a double edged sword for the MPC because it highlights the growing problem of an unbalanced recovery in the UK economy and the complications of implementing monetary policy in such an economic environment. 

On the one hand an excessive lengthy period of low interest rates might be fueling a speculative bubble in equity, bonds and property price creating inflation in certain sectors of the economy, but to raise interest rates now would clobber the already feeble UK industry output. It’s a complicated situation-what is good for the goose isn’t good for the gander.

For too long policy makers have wrongly believed that as advanced economies matured and developed there would be a natural transition from the manufacturing sector to services. Every economic powerhouse today, Germany, USA, Japan, China has manufacturing as the backbone of their economy. It is the manufacturing that should drive the economy, which then results in a demand for services and not the other way around. Outsourcing manufacturing to China has not only resulted in technological transfers, which has directly damaged the manufacturing sector in developed economies, but it has also indirectly damaged the service sector too. As developing economies strengthen their manufacturing sector, they also develop their own service sectors, banking, insurance etc and leave developed economies in the cold. Maybe this is why Former US Treasury Secretary Larry Summers believes that there is a , “long-term, “secular” stagnation of the developed economies.”

MPC will no doubt be gauging the adverse effects that rate hikes could have on UK industry. Perhaps the hawkish screeches for interest rate rises might just be all in vain. Time will tell.



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